SIDEBAR: Prepare for the Worst

If you're hitching your fortune to an IT contract, get yourself a good prenuptial too

Andrew Sorensen, senior associate with law firm Deacons, says good contracts - particularly service contracts - will have a disengagement component as well. This should identify how the contract will end, any transition procedures, how IP will be apportioned and often ensure that source code be made available through an escrow agent.

Even if things come to a sticky end, it can be possible to negotiate liability into the contract. But be prepared for a Dutch auction.

According to Blake Dawson Waldron's Dr Gordon Hughes, the IT supplier seeks to limit the liabilities for damages. "They do this because they say that IT remains volatile and they have no control over how much reliance the customer places on the IT. Therefore they say they want no liability. The customers say: 'We're putting our life in your hands so you should be liable.' Then the parties negotiate a middle route where there is a capped liability."

Since July 2004 this area has become more opaque. Changes to Section 52 of the Trade Practices Act (the section that deals with misleading and deceptive conduct), which apply to claims arising on or after July 26, 2004, will affect liability in IT contracts.

According to Peter Knight, a senior IT lawyer with Clayton Utz, "A supplier will still be liable for its misrepresentations, but if the purchaser was careless in relying on the misrepresentations, the damages it can claim will be reduced by contributory negligence". Knight says the added risk this represents to the purchaser makes it even more important that both the vendor and purchaser "actively consider and agree upon - or agree to reject - mandatory performance requirements" prior to any contract being inked.

SIDEBAR: Public Liability

Big guns tread carefully, smaller ones hardly at all

One of the benefits of being a public service CIO is that government contracts have a default position demanding uncapped liability from their IT suppliers. It has made IT suppliers a bit more careful about what they promise when they are selling to government departments. It has also played into the hands of the larger IT suppliers that are better able to take on the risk of uncapped liability than their indigenous competitors.

According to the Australian Information Industry Association (AIIA), during 2004 the public sector will have invested $6.5 billion on information and communications technologies. In August the AIIA, which has long lobbied the government on this issue of uncapped liability being an impediment to smaller suppliers, released the findings of a survey by law firm Corrs Chambers Westgarth and Lumbers Consulting.

That report found that if the government took a more flexible approach to limiting supplier liability there would be cost savings for government, better participation by indigenous IT suppliers in the public sector market, better contract results, more innovative solutions and a greater focus on project risk management. The study, Better Practice Better Outcomes, also found it would be possible to reduce contract negotiation costs considerably and reduce the amount of money paid to offshore insurers.

All this from allowing more flexible contracts.

In the lead-up to the October federal election, the Coalition and Labor parties said they would review the issue of uncapped liability were they to win the election. Public sector CIOs will have to watch and see whether it was a "core promise".